Nodal Pricing Coming to Texas Wholesale Power Market

Michael Giberson

A story by Purva Patel in the Houston Chronicle does a reasonably good job explaining the upcoming shift from a zonal to a nodal market design for the ERCOT market in Texas. It is a complicated matter and hard to convey to non-specialist readers.

(In fact, even some specialists appear confused about parts of the bigger picture as evidenced by the comments reported of an attorney “who represents cities in utility issues and who sits on ERCOT’s Technical Advisory Committee.”  The attorney claims that while a “nodal system may make it easier to spot congestion and where new power plants are needed, it ignores the reality of how plants are built.”

How does it “ignore the reality of how plants are built”? The gist of the point seems to be that prices will rise at points in places like Houston but it is unlikely a new power plant could be built in Houston because of space limitations, public opposition, and air quality problems.

The misunderstanding may arise because of loose talk about how a more transparent and efficient pricing system will signal where new power plants are needed. This is not quite right. The more transparent and efficient pricing system will just do a better job of revealing the value of power at various locations on the grid.  What consumers and producers do with that information – build new power plants, add transmission, reduce consumption, or just pay the higher prices – is up to them.)

UPDATE: The Austin American-Statesman ran a story on Texas nodal the same day. It reveals something about the differences between Houston and Austin that the Houston story focused more on the practical aspects of the change while the Austin story highlights the behind-the-scenes politics.


3 thoughts on “Nodal Pricing Coming to Texas Wholesale Power Market

  1. Mike,

    The pattern in ERCOT for the last fifteen years is for the Public Utility Commission of Texas to approve new transmission projects to reduce locational price differentials and remove import constraints, especially into Houston and DFW. Air quality issues are an important factor in urban areas in ERCOT, as you mention.

    What nodal pricing is likely to do, with respect to generation siting, is to inform generators where NOT to build at the subzonal level, especially new wind farms in West Texas.

  2. Eric, do you have a view as to the effect of continued zonal pricing for load? Is this a problem that will explode into view in the first few months, or can ERCOT live with it for years?

  3. Mike,

    The PUC of Texas required zonal pricing for load for essentially two reasons:

    1. Mass retailing (residential, small commercial) is easier with large zones with fixed boundaries.

    2. Concern that some people would pay significantly higher prices than others for a weaker subzonal transmission system, if loads were priced subzonally.

    I believe that zonal pricing for loads is sustainable. The biggest concerns for pricing anamolies are data and system errors that have yet to be detected. The PUC of Texas has granted ERCOT the ability to have a lower offer cap for the first 45 days of the new market to mitigate this risk.

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